4 min read

Here are a few numbers to think about.

If you start with a net worth of $0, save $10,000 per year, and earn 7% annual investment returns on your savings, you will have just over $1 million after 30 years.

From year 1 to year 2, your net worth would grow by $11,449. Most of this growth would come from savings, but a small portion of it would come from investment returns.

From year 29 to year 30, though, your net worth would grow by $76,122, with most of that growth coming from investment returns.

In that last year, your net worth would increase by about the same amount as the first six years *combined.*

That’s a bit crazy to think about.

Given these first few charts, how much longer do you think it would take to save $2 million?

If you knew nothing about compound interest, you might mistakenly think it would take another 30 years.

Even if you were familiar with the concept, you might think it would take another 15 – 20 years to reach $2 million.

It turns out that it would only take about another 9 years:

And the growth in the last year would be larger than the first nine years combined:

Knowing this, how long do you think it would take to reach $3 million?

Turns out, about six more years:

The growth in the last year would be roughly the same as the first 13 years combined:

Think about that for a moment. **In the last 365 days, your net worth would increase by roughly the same as it did during the first 13 years.**

These examples illustrate exactly why compound interest is so counterintuitive to us. It’s hard to wrap our heads around how extreme the numbers get towards the tail end.

Perhaps the best example of compound interest in the wild is Warren Buffett’s net worth growth:

From age 72 to 83, his net worth increased by about the same amount as it did from age 14 to 72.

That’s mind-boggling.

For anyone with a 30+ year time horizon, compound interest will work wonders in the later years.

Unfortunately, it’s not such a powerful force during shorter time frames.

## Does Compound Interest Matter for Early Retirees?

For anyone attempting to achieve a level of financial flexibility in 10 years or less (whether or not that means complete financial independence), you can’t rely on compound interest.

Consider a couple who decides to save $30k per year for 10 years. After that, they may decide to quit their day jobs and pursue a life of part-time work and travel.

If they earn 7% investment returns, they’ll have $443,000 at the end of this 10-year period:

Notice how the net worth growth looks linear here. We don’t see that crazy upward curve at the end of the chart like we did in the previous charts. That’s because we don’t give compound interest enough time to flex it’s muscles.

From year 1 to year 2, net worth would increase by $34,347.

From year 9 to year 10, it would increase by $59,014.

That’s a nice increase, but it’s nothing compared to what we saw in the previous charts.

## The Takeaway

Compound interest isn’t a powerful force in the short-term (10 years or less), but it’s ridiculously strong over the long-term. In fact, we often underestimate just how strong it can be over the course of several decades.

For anyone seeking a short path to financial flexibility, this means you should focus on your savings rate. You can’t rely on compound interest too much.

You can, however, still take advantage of the power of compound interest. Consider the couple who saves up $400k before quitting their day jobs. Suppose they decide to not touch $100k of those savings and let it grow over time. They’ll use the other $300k if they need to.

In an earlier post, I analyzed how $100k has historically grown over 30-year periods without additional contributions.

During the worst 30-year stretch (1965 – 1994), $100k tripled in value to $361k. In the best 30-year stretch (1932 – 1961), it grew to an insane $1.7m.

A potential strategy for anyone who wants to retire or semi-retire in 10 years or less is to save up enough money to quit your job, set aside a certain amount of savings to let grow for several decades, and use a combination of active income and savings to cover your living expenses.

This way, you can use a high savings rate to achieve financial flexibility, and still take advantage of the power of compound interest over the long run.

My favorite free financial tool I use is **Personal Capital. **I use it to track my net worth, manage my spending, and keep an eye on my monthly cash flow. It only takes a few minutes to set up and it makes tracking your finances simple and easy. I recommend trying it out.

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I am somewhat mesmerized by the Buffet graph. I watched a documentary about him but I didn’t know he had $5k as a 14 year old. Was that $5k inflation adjusted? That would be a very wealthy preteen if not!

Back on topic, our date is right about 9 , 10 years away and we didn’t include much returns to get us there. It’s raw savings until the very end.

I’m not sure if that $5k is inflation adjusted or not actually…but it just shows how he had a knack for getting his hands on money at a young age. The chart is pretty mind-blowing the more you look at it.

That’s nice you’re taking such a conservative long-term view with your finances. Basically if we have a horrible future decade of returns, it won’t sway your expectations at all. If we do get decent returns, that will just bring your F.I. date that much closer 🙂

Excellent post. Retirement accounts are a great way of making sure that an early retiree sets aside a chunk of money to grow for a few decades without touching it.

You have quickly become one of my favorite FI bloggers! Your posts have helped me think outside the box and made me realize just how quickly it will be possible to get out from under the fluorescent lights. Many many thanks!

Thank you very much! Glad you’re enjoying the posts 🙂 I like that phrase – “get out from under the fluorescent lights” – it’s a goal I’m chasing as well.

Love these quick and simple, but really impactful and important to understand posts you’ve been putting out lately.

Keep up the great work!

Thank you! Glad to hear you’re enjoying them 🙂

Great article. It really opens your eyes when you are aiming to retire early. Thank you for doing the research and putting this together!

No problem, thanks for stopping by! 🙂

So good I can’t stand it! Thanks for the reminder of the power of compounding.

Thanks so much!!

I always love these. 🙂 Thanks for posting!

Thanks for reading, as always 🙂

You should baseline inflation for your 30year 100K graph for reference.

Im sure the 361K hardly outperformed.

Love the blog, its my second favourite already! thanks.

The graph actually is inflation adjusted, which means the 361K actually did outperform by that much EVEN after accounting for inflation.

Glad to hear you’re enjoying the blog…hopefully I can climb up to that number one spot!

Great illustrations on the power of compounding interest. We are finally starting to see that upward curve in our investments too and it feels great! It’s hard to be patient in the early years of saving, but such an encouragement to keep going as the money starts working for you!

Agreed, the early years require patience to get to the later years where the returns begin to make an impact. Thanks for reading 🙂

Awesome stuff, Zach! Just remember to take the money you would’ve paid a financial advisor, and instead use it for a damn good accountant. 🙂

Thanks, Cubert! Agree with you on the accountant advice 🙂

Man… I wish your articles were around at the start of my FIRE journey! I went in only halfheartedly for the first couple of years, because it just seemed so wildly impossible to me, and it took a while before I got really committed. But your advice and practical examples of alternate routes really make the paths more accessible to anyone and everyone. And even for those of us who have been toying with some of these out-of-the-box FIRE options before (active retirement, for one), your tools and visualizations help us get a better grip on what that could look like, and how to get there.

Thanks for all you do! 🙂

PS: that Warren Buffett graph — HOLY WOW!

Thanks, Juli! Glad to hear you’re finding so much value in these posts 🙂 And yes, that Buffett graph is nuts. It shows the true power of compound interest when you let it work for 60+ years.